China's big, state-owned banks are shunning many of the
4,200 energy service companies (ESCOs), industry experts say,
raising fears of a shakeout alongside the malaise now afflicting
the solar panel, wind generator and LED industries.

The banks, traditionally lenders to state-owned enterprises,
are reluctant to extend credit to ESCOs which sell energy-saving
advice and technology to wasteful industry including steel
mills, cement factories and petrochemical plants.

Loan officers at the state banks are wary of these companies
because of their unfamiliar business models and a lack of
collateral compared with other industrial borrowers.

"ESCOs go to banks for loans, but most banks just ignore
them," said Sun Xiaoliang, assistant to the chairman of the ESCO
Committee of China Energy Conservation Association, an industry
lobby with more than 800 members from this sector.

And, to compound the funding crisis, demand for their
services is easing as China's economy slows. Expansion in
industrial output at the start of the year was at its weakest
since early 2009, according to official statistics.

A looming shakeout for ESCOs comes as overcapacity and a
collapse in demand batter China's wind generator and solar panel
makers - two industries which Beijing had championed to lead a
green energy revolution.

Similar problems are hurting the makers of LED lighting, a
technology that offers sizeable energy savings for the world's
second-ranked economy and biggest energy user.

Like their counterparts in the U.S. and Europe, they pay
upfront for these efficiency upgrades under so-called energy
performance contracts in exchange for a share of long-term
savings from reduced energy bills.

For China, which relies on burning coal for 80 percent of
its electricity, ESCOs have an important role to play in
minimising waste in industries that lag far behind developed
countries in energy efficiency, experts say.

In a bid to turn this around, Beijing has been pouring
billions of dollars into improving fuel efficiency and fostering
renewable power as it strives to slash its "carbon intensity" -
carbon dioxide emissions per unit of economic growth - by 40-45
percent from 2005 levels by 2020.

This drive sparked a decade of rapid growth in the number of
ESCOs as they sucked billions of dollars in equity and debt
capital from venture capitalists, small domestic banks and
foreign institutions like Luxembourg-based Global Energy
Efficiency and Renewable Energy Fund.

Despite this heady expansion, most remained small. Of China
ESCOs, only 18 had revenue of more than 500 million yuan in
2012. Just six had revenue exceeding 1 billion yuan.

But, without the backing of the big state banks in a
sluggish economy, many of these companies are now struggling to
survive.

The International Finance Corp (IFC) has helped arrange
about $780 million in loans to energy efficiency projects since
2006, mostly from smaller lenders including Shanghai Pudong
Development Bank Co Ltd.

"That's only a drop in the bucket and the large four banks
will have a far greater impact," said William Beloe,
Beijing-based senior operations officer for the IFC who oversees
energy efficiency financing for the World Bank unit.

A spokesman for state-run giant Industrial and Commercial
Bank of China (ICBC) said the bank had
been ramping up lending to small and micro businesses.

"But we don't lend money to all kinds of businesses, just
like elsewhere," he said, when asked if ICBC extends loans to
ESCOs.

GROWTH SLOWING

Growth in the sector is now slowing sharply. Project
investment by ESCOs expanded 23 percent to 51 billion yuan ($8.1
billion) in 2012, compared with an average annual growth of over
65 percent between 2003 and 2010, industry figures show.

Lack of finance is not the only reason some small ESCOs are
going out of business as the industry consolidates.

"Sometimes it's because their clients had run into financial
problems and defaulted on payment," said China Energy
Conservation Association's Sun. "Sometimes it's because clients
violated contracts."

As the slowdown bites, customers are negotiating energy
performance contracts that run longer than the typical term of
between three and eight years, delaying returns and increasing
risk for the service companies.

All contracts of Top Resource Conservation Engineering
, a major Chinese ESCO specialising in heat recycling
for power generation, carry maturities of 20 years, said Cheng
Yan, an official at the Beijing-based firm's securities office.

SHAKE-OUT

Most likely to survive a shakeout are ESCOs with rich,
powerful parents including China's Baosteel, France's Schneider
Electric SA, Johnson Controls Inc and
Honeywell International Inc.

Some relatively big ESCOs listed on the domestic stock
market have also snapped up smaller rivals.

Shenzhen DAS Intellitech Co Ltd last year spent
201 million yuan to buy a Shanghai-based company specialising in
energy-saving services for buildings from a group of domestic
venture capital firms.

Zhejiang Dun'an Artificial Environment Co Ltd,
which is also involved in energy-saving businesses, has made a
string of acquisitions in the last few years to expand its ESCO
business.

Still, there is a pressing need to curb energy waste. The
heavy, toxic smog that blanketed Beijing and much of northern
China in January may serve as a strong wake-up call for the
government to take stronger measures to support ESCOs and cap
emissions, industry officials say.